Finally, the Web is transforming the commercial real estate market. Those who hate paying high commissions may soon rejoice.
Jesse White, an oil and gas investor in Denver, was searching for a property to buy last year. He needed to move fast because his company, Apollo Operating, had recently sold a property and he wanted to defer capital gains under the tax rules for property exchanges. With time running out, he got a call from his broker, who said that he'd seen a property online, on a site called LoopNet (NASDAQ:LOOP), that looked interesting--a $900,000 building in Commerce City, Colorado.
Tom Welsh, who runs a brokerage called Welsh Commercial, had posted the property for the seller. Real estate is a who-you-know kind of business, and Welsh says he was skeptical at first of trying to do a deal over the Web with an unknown buyer instead of a qualified one he had worked with in the past. But his client had wanted to move the property, so why not post it? In addition to White, Welsh says dozens of people contacted him via LoopNet. In the end White got the deal for the asking price by agreeing to close in an astonishing four days. "I think what this does is open up the market for that many more people, the same as the Internet has done for a lot of things," White says. "It brings buyers and sellers together at lower cost, and gives you more dealmaking ability."
At long last, the vast technological capabilities that have changed other businesses are shifting the old dynamics of commercial real estate, once one of the most insular of industries. Companies like LoopNet, an online marketplace for commercial properties, and CoStar (NASDAQ:CSGP), a massive database of information on commercial real estate, are giving buyers and tenants more power than ever before, changing the role of the real estate broker, making history of the adage that all real estate is local, and helping companies find offices, warehouses, and retail spaces with a few clicks of a mouse.
For business owners, the changes may turn out to be particularly dramatic. In the past, top brokers have shunned small deals as not worth the effort, but as they're able to close deals faster, they may grow more willing to think small. And as in any industry in which information becomes broadly available, transactions should become more efficient and fees should fall. That's already happened in residential real estate, where online services are helping to undermine the standard 6 percent commission. Commercial transactions are more complex, so it's unlikely that brokers will be cut out entirely, but the trend toward lower fees is likely to be the same.
Talking to brokers, I would hear about listings after they'd been in escrow for a few days. Online data was the great equalizer." Marlene Allan, Loopnet user
Getting to this point hasn't been easy. For the past decade, scores of companies backed by well over $500 million in capital have tried to create a national marketplace for commercial real estate. The opportunity was huge, but turning a collection of fragmented local markets into a national one wasn't easy. The shakeout was brutal. CoStar and LoopNet survived and are showing new promise, as are companies like Reis (an online data provider), Cityfeet (an online marketplace), and CCIMNet (an affiliate of the National Association of Realtors). Here's how they're transforming the market:
Online, you can search creatively
The ability to search online listings lets a buyer or renter get a better sense of what's out there and what price to pay. Marlene Allan of Camarillo, California, went online in frustration to find a new home for her husband's medical practice. The difficulty was in finding a space suitable for elderly patients. "Talking to brokers, I would hear about listings after they'd been in escrow for a few days," she recalls. On LoopNet, she found a car repair center that, with a lot of retrofitting, would work. This odd solution, which required deft negotiations with the city and the bank (the building was about $1 million, the renovation another $550,000), was one that few brokers would suggest. "Online data was the great equalizer," Allan says.
Geography matters less
A decade ago, the average distance from a broker's office to a leased building was just seven miles, according to data collected by CoStar; today it's 41 miles--and the distance is growing. Thus, a buyer in California searching for a grocery-anchored shopping center in a wealthy neighborhood might have previously looked only in-state, but by browsing demographic data and going on a virtual tour, the buyer might discover a North Carolina property that shares these attributes and is as much as $15 million cheaper.
More information, less fudging
A verity of securities markets is that the more information there is, the more efficiently the market runs. Less obvious, perhaps, is just how poorly commercial real estate transactions have been priced in the past because of lack of information. Floor sizes may be fudged a little here, rental costs inflated a little there. Say you run a small company that's looking to rent a new 5,000-square-foot headquarters in Los Angeles. Your broker tells you that the price in the building you like is $3 per square foot per month--but he'll give you a deal at $2.95. If you have no means of comparison, you'll likely accept, paying annual rent of $177,000. But what if there are other deals available in that building, which your broker hasn't mentioned, for $2.25 per square foot per month. If you can find that out and rent that space instead, you save 70 cents per square foot per month, or $42,000 per year--a big reward.
Let's hear it for healthy competition
With their costs of doing business falling because of these online services, brokers are finding they can do more deals faster--and maybe even make more with volume while charging less. Tom Welsh, who sold that Colorado property online, says the new services encouraged him to go out on his own after a long career at the large commercial brokerages like Cushman & Wakefield. "The databases have become much more affordable and the costs have gone down," Welsh says. "We used to have to print thousands and thousands of dollars' worth of books; now you can do a $30 million listing for a couple hundred bucks." Does that mean that--now that he's not giving up any of his commission to the house--he's willing to negotiate his fee? "Sure, you can be a little more competitive," Welsh says. "It's dog-eat-dog out there."
For people who rely on brokers, that's very good news.